1.

What are the basic benefits and purposes of developing pro forma statements and a cash
budget?
The pro-forma financial statement and cash budget enable the firms to determine its
future level of asset needs and the association financing that will be required. Furthermore,
one can track actual events against the projections. Bankers and other lenders also use these
financial statements as a guide in credit decisions.

2. Explain how the collections and purchase schedules are related to the borrowing needs of
the corporation.
The collections and purchase schedules measure the speed at which receivables are
collected and purchases are paid. To the extent collections do not cover purchasing cost and
other financial requirements, the firm must look to borrowing to cover the deficit.

3. Explain the relationship between inventory turnover and purchasing needs.

The more rapid the turnover of inventory, the greater the need for purchases and
replacement. Rapidly turning inventory makes for somewhat greater ease in foreseeing the
future requirements and reduces the cost of carrying inventory.

4. Rapid corporate growth in sales and profits can cause financing problems. Elaborate on
this statement.
Oftentimes when a business undergoes rapid growth in sales and profits, asset growth
also increases rapidly. It may be difficult for a business to come up with the funds from
suppliers, the bank, or stockholders in a reasonable amount of time. For example, if I made
P30K profit this year but asset growth was P60K due to the growth, I would have to find a way
to finance the remaining amount.

5. Discuss the advantage and disadvantage of level production schedules in firms with
cyclical sales.
Level production in a cyclical industry has the advantage of allowing for the maintenance
of a stable work force and reducing inefficiencies caused by shutting down production during
slow periods and accelerating work during crash production periods. A major drawback is that
a large stock of inventory may be accumulated during the slow sales period. This inventory
may be expensive to finance, with an associated danger of obsolescence.

6. What conditions would help make a percent-of-sales forecast almost as accurate as pro
forma financial statements and cash budgets? 
The percent-of-sales forecast is only as good as the functional relationship of assets and
liabilities to sales. To the extent that past relationships accurately depict the future, the
percent-of-sales method will give values that reasonably represent the values derived through
the pro-forma statements and the cash budget.

7. Define each of the following items:

a) Sales forecast
b) Projected financial statements method
c) Spontaneously generated funds
d) Dividend payout ratio
e) Pro forma statement
f) Additional funds needed (AFN), AFN formula
g) Capital intensity ratio
h) Lumpy assets
i) Financing feedback

a. Sales forecasting is the process of estimating future revenue by predicting the amount of
product or services a sales unit (which can be an individual salesperson, a sales team,
or a company) will sell in the next week, month, quarter, or year.

b. Projected financial statements incorporate current trends and expectations to arrive

at a financial picture that management believes it can attain as of a future date. At a
minimum, projected financial statements will show a summary-level income
statement and balance sheet. This information is typically derived from a revenue
 trend line, as well as expense percentages that are based on the current proportions
of expenses to revenues.

c. Spontaneously generated funds are best defined as: Funds that are obtained

automatically from normal operations, and they include increases in accounts payable
and accruals.

d. The dividend payout ratio is the ratio of the total amount of dividends paid out to
shareholders relative to the net income of the company. It is the percentage of earnings
paid to shareholders in dividends. The amount that is not paid to shareholders is retained
by the company to pay off debt or to reinvest in core operations. It is sometimes simply
referred to as the 'payout ratio.'

e. In Latin, the term “pro forma” is roughly translated as “for form” or “as a matter of form.”
So, what is a pro forma statement? Essentially, pro forma financial statements are
financial reports based on hypothetical scenarios that utilize assumptions or financial
projections.

f. Additional funds needed (AFN) is the amount of money a company must raise from
external sources to finance the increase in assets required to support increased level of
sales. Additional funds needed (AFN) is also called external financing needed. The
simplified formula is: AFN = Projected increase in assets – spontaneous increase in
liabilities – any increase in retained earnings. If this value is negative, this means the
action or project which is being undertaken will generate extra income for the company,
which can be invested elsewhere.

g. The term "capital intensive" refers to business processes or industries that require large
amounts of investment to produce a good or service and thus have a high percentage of
fixed assets, such as property, plant, and equipment (PP&E). Companies in capital-
intensive industries are often marked by high levels of depreciation.

h. Lumpy Assets is refer to Assests that cannot be acquired in small increments but must
be obtained in large, discrete units.

i. Financing Feedback. Is the effects on the income statement and balance sheet of
actions taken to finance forecasted increases in assets.

8. What is Budget? What is budget control?

A budget is a detailed quantitative plan for the acquisition and use of financial and other
resources over a given time period. Budgetary control involves using budgets to increase the
likelihood that all parts of an organization are working together to achieve the goals set down
in the planning stage.

9. Discuss some of the major benefits to be gained from budgeting.

 Budgets communicate management's plans throughout the organization.
 Budgets force managers to think about and plan for the future. In the absence of the
necessity to prepare a budget, many managers would spend all of their time dealing with
day-to-day emergencies.
 The budgeting process provides a means of allocating resources to those parts of the
organization where they can be used most effectively.
 The budgeting process can uncover potential bottlenecks before they occur.
 Budgets coordinate the activities of the entire organization by integrating the plans of its
various parts. Budgeting helps to ensure that everyone in the organization is pulling in
the same direction.
 Budgets define goals and objectives that can serve as benchmarks for evaluating
subsequent performance.

10. What is a master budget? Briefly discuss its contents.

A master budget represents a summary of all of management's plans and goals for the
future, and outlines the way in which these plans are to be accomplished. The master budget
is composed of a number of smaller, specific budgets encompassing sales, production, raw
materials, direct labor, manufacturing overhead, selling and administrative expenses, and
inventories. The master budget usually also contains a budgeted income statement, budgeted
balance sheet, and cash budget.

11. Why is the sales forecast the starting point for budgeting?
The level of sales impacts virtually every other aspect of the firm's activities. It
determines the production budget, cash collections, cash disbursements, and selling and
administrative budget that in turn determine the cash budget and budgeted income statement
and balance sheet.

12. "As a practical matter, planning and control mean exactly the same thing." Do you agree?
Explain.
No. Planning and control are different, although related, concepts. Planning involves
developing goals and developing budgets to achieve those goals. Control, by contrast,
involves the means by which management attempts to ensure that the goals set down at the
planning stage are attained.

13. Describe the flow of budget data in an organization. who are the participants in the
budgeting process, and how do they participate?
The flow of budgeting information moves in two directions—upward and downward. The
initial flow should be from the bottom of the organization upward. Each person having
responsibility over revenues or costs should prepare the budget data against which his or her
subsequent performance will be measured. As the budget data are communicated upward,
higher-level managers should review the budgets for consistency with the overall goals of the
organization and the plans of other units in the organization. Any issues should be resolved in
discussions between the individuals who prepared the budgets and their managers.
All levels of an organization should participate in the budgeting process—not just top
management or the accounting department. Generally, the lower levels will be more familiar
with detailed, day-to-day operating data, and for this reason will have primary responsibility
for developing the specifics in the budget. Top levels of management should have a better
perspective concerning the company's strategy.

14. How can budgeting assist a company in planning its workforce staffing levels?
The direct labor budget and other budgets can be used to forecast workforce staffing
needs. Careful planning can help a company avoid erratic hiring and laying off of employees.

15. "The principal purpose of the cash budget is to see how much cash the company will have
in the bank at the end of the year." Do you agree? Explain.
The principal purpose of the cash budget is NOT to see how much cash the company will
have in the bank at the end of the year. Although this is one of the purposes of the cash
budget, the principal purpose is to provide information on probable cash needs during the
budget period, so that bank loans and other sources of financing can be anticipated and
arranged well in advance.

Ellis Sports Shop projects the following sales: April $75,000 May $95,000 June $110,000
Ninety percent of Ellis' sales are on credit with 60% of receivables collected in the month
after the sale and the rest of receivables collected in the second month after the sale.
February sales were $60,000 and March sales were $70,000. In the past Ellis' bad debt
percentage has been 0 and is expected to continue.
a) Prepare a monthly schedule of cash receipts for April-June.

Eli Lilly Beginning cash $120,000 – Asset buildup (300,000) (1/2 ×

$600,000) Profit 96,000 (8% × $1,200,000) Ending cash ($84,000)
Deficit No, he will actually end up with a negative cash balance.
b) What is the balance of Receivables at the end of June?
Beginning cash $120,000 No asset buildup ----- Profit 48,000 (8% ×
$600,000) Ending cash $168,000 The lesson to be learned is that
increased sales can increase the financing requirements and reduce
cash even for a profitable firm. S
2. Eddie's Bar and Restaurant Supplies expects its revenues and payments for the first part of the
year to be:

Cash Receipt

January February March April May

Cash $4 200 $6 000 $7 800 $6 600 $5 400
Credit $9 800 $14 000 $18 200 $15 400 $12 600
Collections:
Cash $7 800 $6 600 $5 400
40% in following month $5 600 $7 280 $6 160
60% in second month $5 880 $8 400 $10 920
Total Collections $19 280 $22 280 $22 480

Cash Budget

January February March April May

Collections $19 280 $22 280 $22 480
Payments - $21 300 $19 100 $22 400
Cash Flow- $2 020 $3 180 $80
Beginning Cash Flow + $2 000 $2 000 $2 000
Cum. Cash Balance -$20 $5 180 $2 080
Loan (Repayment) $2 020 -$3 180 -$80
Cum. Loan Balance $4 020 $840 $760
Ending Cash Balance $2 000 $2 000 $2 0004

3. Frank s sporting goods projects sales for the second quarter of 200X to be as follows:
April $ 100,000 May $ 120,000 June $110,000 10% of Frank s sales are for cash, 70% of
accounts receivable are collected on month following the sale, and the rest are collected
two months following the sale. January sales were $40,000, February sales were
$60,000, and March sales were $80,000.
Outcome Probability Units Price Total Value Expected Value
(2 × 5)
A .20 100 20 2,000 400
B .50 180 25 4,500 2,250
C .30 210 30 6,300 1,890
Total expected value $4,540
 a) Prepare a monthly schedule of cash receipts for the second quarter of 200X
b) What is the balance in accounts receivable at the end of June?       
4. Silver Company makes a product that is very popular as a Mother's Day gift. Thus, peak
sales occur in May of each year, as shown in the company's sales budget for the second
quarter given below:
Required:
a. Prepare a schedule of expected cash collections from sales, by month and in total, for the
second quarter.
Schedule of Expected Cash Collections
April May June Total
February sales: $230,000 × 10% $23,000 $23,000
March sales: $260,000 × 70%, 10% 182,000 $26,000 208,000
April sales: $300,000 × 20%, 70%, 10% 60,000 210,000 $30,000 300,000
May sales: $500,000 × 20%, 70% 100,000 350,000 450,000
June sales: $200,000 × 20% 40,000 40,000
Total cash collections $265,000 $336,000 $420,000 $1,021,000

b. What is the accounts receivable balance on June 30th?

Accounts receivable at June 30:

From May sales: $500,000 × 10% = $50,000

From June sales: $200,000 × (70% + 10%) = $160,000

5. Cyber Security Systems had sales of 3,900 units at $95 per unit last year. The marketing
manager projects a 25 percent increase in unit volume sales this year with a 20 percent price
increase. Returned merchandise will represent 6 percent of total sales. What is your net dollar
sales projection for this year?

The net dollar sales projection for this year=$522,405

Explanation:

Step 1

Determine the initial price and initial quantity of sales as shown;

initial price=$95

initial quantity of sales=3,900 units

Step 2

Determine the projected price and projected quantity of sales as shown;

projected price=initial price+percentage increase

where;

initial price=$95

percentage increase=(20/100)×95=$19

replacing;

projected price=95+19=$114

projected quantity of sales=initial quantity+percentage increase

where;

initial quantity=3,900
percentage increase=(25/100)×3,900=$975

replacing;

projected quantity of sales=3,900+975=4,875 units

Step 3

Determine the total sales in terms of dollars;

total sales=(114×4,875)=$555,750

Step 4

Determine net sales as follows;

net sales=total sales-returned merchandise

where;

total sales=$555,750

returned merchandise=(6/100)×555,750=$33,345

net sales=(555,750-33,345)=$522,405

The net dollar sales projection for this year=$522,405

6. Sales for Western Boot Stores are expected to be 40,000

units for October. The company likes to maintain 15 percent of unit sales for each month in
ending inventory (i.e., the end of October
). Beginning inventory for October is 8,500 units.
How many units should Western Boot produce for the coming month?

Western Boot Stores

+Projected sales..................................40,000 units
+Desired ending inventory...................6,000 (15% × 40,000)
–Beginning inventory...........................8,500
Units to be produced............................37,500

7. Victoria Company had sales of 8,000 units in March. A 50 percent increase is expected in
April. The company will maintain 5 percent of expected unit sales for April in ending inventory.
Beginning inventory for April was 400 units. How many units should the company produce in
April?

Victoria Company
+ Projected sales..........................12,000 units(8,000 × 1.50)
+ Desired ending inventory...........600 (5% × 12,000)
–Beginning inventory....................400
Units to be produced....................12,200

8. Brenda Company has beginning inventory of 14,000 units, will sell

50,000 units for the month, and desires to reduce ending inventory to 40 percent
of beginning inventory. How many units should Brenda produce?

Brenda Plumbing Company

+Projected sales...................50,000units
+Desired ending inventory....5,600(40% * 14,000)
–Beginning inventory............14,000
Units to be produced........….41,600

9. Victorias Apparels has forecast credit sales for the fourth quarter of the year as:
September (actual)............................. 70,000
October........................................ 60,000
November....................................... 55,000
December....................................... 80,000
Experience has shown that 20 percent of sales are collected in the month of sale, 70 percent
in the following month, and 10 percent are never collected. Prepare a schedule of cash
receipts for J. Lo’s Clothiers covering the fourth quarter (October through December).

Victorias Apparel
September October November December
Credit sales 70,000 60,000 55,000 80,000
20% 14,000 12,000 11,000 16,000
Collected in
month of
sales
60% 42,000 36,000 33,000 48,000
Collected in
month after
sales
Total cash 56,000 48,000 44,000 64,000
receipts